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Payment defaults from business-to-business transactions are at record highs despite a slight improvement in conditions, recent data shows.
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Invoice defaults climb to record highs: CreditorWatch
13 March 2024
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10 minute read
Increasing cost pressures on Australian businesses have driven a 47.9 per cent year-on-year increase in B2B trade payment defaults, according to the latest CreditorWatch Business Risk Index.
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External administrations are also now sitting consistently above pre-pandemic levels and are up 24.6 per cent year on year.
While the February index data recorded a seasonal increase in the average value of invoices from January to February (up 10.4 per cent) values continue to trend downward and sit at their lowest point since September, according to the credit agency.
CreditorWatch chief executive Patrick Coghlan said the rise in B2B payment defaults and falling invoice values are a concerning combination.
“This indicates that cash reserves are being depleted and margins are being squeezed. An increasing number of businesses have less cash coming in, which means they are then finding it more difficult to pay their own suppliers and as such we are seeing a steep increase in payment defaults being registered on the CreditorWatch database,” said Coghlan.
“They are also cutting the size of their orders and running down inventories.”
CreditorWatch said there is a strong correlation between payment defaults and business failures.
“Businesses with one default have a 24 per cent chance of going insolvent in the next 12 months. This rises to 42 per cent for two defaults against two businesses and 62 per cent for three defaults against three businesses,” it said.
CreditorWatch is expecting the rate of external administrations will continue to increase over 2024 based on the rate of trade payment defaults recorded in February.
The latest NAB business survey indicated that businesses remain resilient, however, with business conditions increasing three points to 10 index points.
Trading conditions and profitability both rose 4 points, while the employment index was broadly steady, according to the survey for February 2024.
Business confidence saw a slight drop from 1 point to 0 points, falling below average levels.
NAB chief economist Alan Oster said the improvement in February brought business conditions back above their long-run average.
“The improvement was led by trading conditions and profitability and unwinds some of the easing we’ve seen in conditions since late 2023 – but it is really too early to say if this is just a temporary lift or the beginning of a more meaningful turnaround,” said Oster.
The major bank said conditions across different industries are still very mixed, with some sectors under a lot of pressure.
“Conditions look very robust in some of the services sectors such as transport, recreation and personal services and finance, business and property,” said Oster.
“On the other hand, retail and construction both look fairly weak, which reflects direct exposure to the high level of interest rates.”
The CreditorWatch data indicated that the food and beverage services sector still has the highest rate of external administrations.
“This sector is expected to remain to maintain its unenviable position at the top of this table as Australians pull back their spending at restaurants and on takeaway in the face of cost-of-living pressures,” the credit agency said.
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